ANNUAL REPOR T 2000 PA TENT ENFORCEMENT AND ROY AL TIES L TD
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ANNUAL
REPOR
T 2000
PA
TENT ENFORCEMENT AND ROY
AL
TIES L
TD
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PATENT ENFORCEMENT AND ROYALTIES LTD.
Innovation is the life force of our modern society. Technology related to
wireless communication, software, Internet business, biotechnology and
genetic engineering has resulted in significant changes to our way of living.
The impact of innovation in these areas will be even more dramatic than
that which occurred during the industrial revolution of the 1800s.
Patent Enforcement and Royalties Ltd. is a public company that has
developed a unique method of investing in these innovations, whether in
the form of patents or other intellectual property. PEARL helps creators
and inventors of intellectual property by assisting those who have had their
creations stolen by large corporations. While the vast majority of intellectual
property never amounts to commercial success, PEARL's strategy dramati-
cally increases the odds of achieving a positive financial return by only
investing
after
the commercial viability of a patent has been proven.
PEARL's shareholders therefore have a unique pathway to access one of the
most exciting investment sectors of our time. A generous dividend policy
provides our investors with the lion's share of the proceeds from any
successful settlements or court awards while giving PEARL the financial
muscle to build an ever-increasing portfolio of inventions. On the following
pages is the story of PEARL's first year of public life.
* Embraced by inventor's community
* Built a portfolio of five cases
* Raised $2 million to enlarge portfolio
* Went public through reverse takeover
Corporate Profile
Highlights
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Patent Enforcement and Royalties Ltd.
2
In May, 1999, Patent Enforcement and Royalties Ltd. became the first
public company in the world with a mandate to invest in patents and
other intellectual property by assisting inventors in asserting their legal
rights when their inventions have been misappropriated by unscrupulous
corporations.
During its first year of life, PEARL management examined and assessed
more than 75 potential investments, carefully selecting five of them. As
word of PEARL's service becomes more known amongst lawfirms and
inventors in North America and around the world, an increasing number
of diverse opportunities have come our way.
A typical investment scenario is as follows: a patent owner or creator
of intellectual property knows or suspects that a large corporation
(frequently, many large corporations) is using his or her invention without
authorization, and without paying royalties or licensing fees. In many
cases, the inventor had first approached the corporation to market the
patented creation. Although intellectual property infringement is clearly
against the law, it is often difficult for an inventor to gain access to the
corporation's records, and very costly to prove infringement in court. A
typical patent infringement suit can cost hundreds of thousands or even
millions of dollars before justice is served, particularly if the defendant
chooses to prolong the action.
Few individual inventors or small companies have the time or the
finances to negotiate the complex maze of the legal system in order to
secure fairness and equity. In most cases, PEARL negotiates for a significant
portion of future royalties, licensing fees and other revenue in return for
assisting in both case management and the payment of a portion of the
costs associated with the effort. PEARL's compensation also includes a
portion of any settlement or judgment for past royalties or licensing fees.
There is no fixed formula in these investments. PEARL has the ability to
craft an agreement with the inventor that fits his or her needs while
compensating all parties fairly. PEARL may acquire a direct interest in the
patent itself, or it may purchase or acquire shares of the company which
owns the rights to the creation. Furthermore, PEARL may simply earn a
share in the revenue generated by the intellectual property by assisting
with the inevitable and extravagant costs of infringement litigation.
Since it is PEARL's intention to have its shareholders benefit directly
from any success in receiving funds from a settlement or a court award
from the intellectual property it invests in, the company has adopted a
generous dividend plan based on net revenue from any of PEARL's
investments. Although the board retains discretion with respect to the
declaration and payment of dividends, PEARL's dividend plan calls for
Directors' Report to Shareholders
"Few individual inventors
or small companies have
the time or the finances
to negotiate the complex
maze of the legal system
in order to secure fairness
and equity."
"...the company has
adopted a generous
dividend plan based on
net revenue from any of
PEARL's investments."
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Patent Enforcement and Royalties Ltd.
3
the distribution to shareholders of 50% of the net revenue from any
settlement or judgment of up to US$10 million. If net revenue from any
settlement or judgment exceeds $10 million, 75% of such excess would be
distributed as dividends. The same ratios would apply to ongoing royalties
or licensing fees, on a case-by-case basis.
Three of PEARL'S investments involve situations where the inventor,
unable to seek redress through negotiation, has been before the courts
for many years.
Gaus vs Conair
was originally filed in 1994, while
The International Academy of Science vs Novell
was first filed in 1992. A company
that PEARL made an equity investment in, Kinbauri Gold Corp., has been
litigating with IAMGOLD since 1991. PEARL'S two most recent invest-
ments, one involving Internet browser programming technology and the
other a popular line of children's toys, have not yet resorted to the courts
and it is hopeful that meaningful discussions with the infringers will take
place in the near future.
Looking to the future, PEARL intends to continue seeking out and
investing in patents and other intellectual property on much the same
basis as it has done so far. Our goal over the next few years is to increase
the active portfolio to between 20 and 30 investments, a number which
would provide a continuous stream of revenue and exciting news by way
of either settlements or court awards.
PEARL got its start by raising approximately $1.2 million in 1999. The
company then raised a further $2 million (gross proceeds) from a special
warrant offering in March, 2000. Additional financing may be necessary in
the future in order to expand our portfolio further. We would like to thank
the shareholders who have believed in our unique concept. We are confident
that this faith will be rewarded.
On behalf of the Board of Directors,
Brian Courtney,
Chairman and Chief Executive Officer
John Cocomile,
President and Chief Operating Officer
July 15, 2000
"Our goal over the next
few years is to increase
the active portfolio to
between 20 and 30
investments..."
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THE HAIR DRYER SAFETY MECHANISM
In 1999, PEARL acquired a royalty/income interest in a U.S. patent relating
to a safety mechanism used in hair dryers and other appliances. The
patented technology prevents electrical shock in the event that an appliance
containing the device is immersed in water. Subsequent to its purchase of
an interest in this patent, PEARL signed a funding agreement with the
inventor of the technology and the owner of the patent, Dr. Harry Gaus, of
Dilsberg, Germany. Dr. Gaus initiated legal proceedings in the United
States District Court, Southern District of New York, in 1994, alleging
patent infringement. The defendant is Conair Corporation, a leading hair
dryer manufacturer based in Stamford, Connecticut. The safety mechanisms
in the Conair appliances are manufactured predominantly in Costa Rica
and sold in the United States. In October, 1999, the Honorable Kevin T. Duffy
of the United States District Court, Southern District of New York dismissed
Conair's second summary judgment motion, which had been brought in
March, 1999. In May, 2000, Conair's third motion for summary judgment was
denied by the court. A hearing will be held on September 5, 2000, to address
scheduling and other pre-trial issues. A trial is anticipated later in 2000.
THE LOCAL-AREA-NETWORK
In 1999, PEARL acquired an option to purchase 80% of the outstanding
shares of Intellectual Property Resource Corporation ("IPRC") of
Louisville, Kentucky, which holds a 10.5% carried interest in any proceeds
from a U.S. patent issued in 1987 covering critical aspects of the local area
network technology. The inventor of the technology is Dr. Roger Billings
of the International Academy of Science, an educational institution based
in Independence, Missouri. In 1991, the Academy initiated a lawsuit
against Novell Inc., a world leader in local area networking technology,
demanding $220 million in royalties, which have been accruing ever since.
There are a large number of alleged infringers, and a 1993 article in
Business Week magazine indicated at that time that the aggregate claim
from all of the alleged infringers may be worth $62.5 billion in damages.
The suit was stayed in October, 1994 pending re-examination by the U.S.
Patent and Trademark Office. The results of the re-examination and
appeal to the Board of Patent Appeals and Interferences are anticipated
in the near future.
THE WEB BROWSER
Late in 1999, PEARL agreed with UFIL Unified Data Technologies Ltd. to
assist in the enforcement of a patent that covers a number of elements
critical to the next generation of web browsers and other Internet-related
programs. Under the terms of the funding agreement, PEARL will
"In May, 2000, Conair's
third motion for summary
judgment was denied
by the court."
Our Investment Portfolio
Patent Enforcement and Royalties Ltd.
4
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Patent Enforcement and Royalties Ltd.
5
THE WEB BROWSER (continued)
assist in enforcing the claims of UDTL's U.S. Patent covering technology
that allows different forms of stored digital documents to be searched
and accessed more efficiently on the Internet. PEARL's rights are limited
to one application of the UDTL technology, which also has other
commercial applications. It is believed that the patent is being infringed
by the many companies building products based on an emerging metadata
standard known as the Resource Description Framework (RDF). This
standard was issued recently by the World Wide Web Organization, a
standards body with more than 100 of the leading information technology
companies as members. UDTL, a private company registered in
Barbados, claims that RDF relies on technology covered by UDTL's
patent. This Agreement has been assigned to PEARL (New Jersey).
PEARL's agreement with UDTL identifies 45 potential infringers of the
software. In return for enforcing the patent, PEARL will receive 50% of
any revenues after legal costs.
THE CHILDREN'S TOYS
In May, 2000, PEARL (New Jersey) entered into an agreement with a
New York based private toy developer to assist in the enforcement of its
copyright against an international toy manufacturer which is producing
a line of toys and other products in alleged violation of the copyright.
The award-winning toys have been a major marketing success for the
manufacturer. In return for providing financial and case management
assistance, PEARL will receive 50% of all revenue derived from the copyright
after legal fees.
OTHER INVESTMENTS
In two separate transactions in 1999 and 2000, PEARL spent a total of
$304,000 to purchase two series of Preferred Shares of Kinbauri Gold
Corporation. The shares pay dividends based upon revenue, and under
the terms of the agreement PEARL could receive up to $2.2 million based
upon certain revenue assumptions over a five-year period. Kinbauri is
currently involved in a lawsuit against IAMGOLD International African
Mining Gold Corporation. Kinbauri brought an action in 1991 for breach
of contract against IAMGOLD as a result of a failed amalgamation
between the parties. On the liability issue, Kinbauri was successful at
trial. IAMGOLD has appealed the judgment and a hearing date for the
appeal has been scheduled for November 1, 2000. Issues relating to the
damages claimed by Kinbauri will be addressed after the outcome of the
appeal. In this lawsuit, Kinbauri has claimed damages in the amount of
$10 million.
"The award-winning
toys have been a major
marketing success for the
manufacturer."
"It is believed that the
patent is being infringed
by the many companies
building products based
on an emerging metadata
standard known as the
Resource Description
Framework (RDF)."
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The following discussion and analysis of the consolidated financial
condition, changes in financial position and results of operations of
PEARL for the year ended June 30, 2000, and the eight months ended June
30, 1999 should be read in conjunction with the financial statements of
PEARL and related notes thereto.
RESULTS OF OPERATIONS
The Company's only revenue since incorporation has been interest earned
on cash balances. The interest earned is directly related to the amount of
funds on hand. The Company only invests in interest-bearing bank
accounts or R1 rated interest-bearing securities.
General administrative expenses ("G&A") consist of ongoing expenses in
administering the affairs of the Company. The highest expenses in each of
the reported time periods consist of wages and benefits, management
and consulting fees. In the twelve months ended June 30, 2000 these
totaled $349,287 or 63% of total G&A compared to $98,288 or 54% of G&A
in the eight month period ended June 30, 1999.
DEFERRED COSTS
As at June 30, 2000 the Company had deferred costs of $1,176,657
compared to $261,239 as at June 30, 1999. These costs represent amounts
paid or payable in respect of its interests in various intellectual property
infringement suits. At June 30, 2000 93.3% of total deferred costs are costs
related to the Gaus vs Conair case.
WORKING CAPITAL
At June 30, 2000 the Company had $31,678 in working capital compared
to $973,576 on June 30, 1999. In addition to the above there was, at June
30, 2000, $878,845 held by the Company's Transfer Agent pursuant to an
escrow agreement (see Note 8 of the financial statements). The only
source of working capital since incorporation has been equity financing.
OUTLOOK
The Company's goal over the next two to three years is to acquire interests
in 20 to 30 intellectual property rights which have been infringed. The
objective is to have a significant number of cases in various stage of
negotiation, to ensure a steady stream of revenue flowing to the Company
from settlements and judgments. It is also anticipated that once a sufficient
number of cases have been resolved, steady revenue will flow from
royalties. Long-term growth will be assured by reinvesting a portion of all
settlements into new intellectual property cases.
Management Discussion and
Analysis of Financial Statements
Patent Enforcement and Royalties Ltd.
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Patent Enforcement and Royalties Ltd.
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Auditors' Report
To the Shareholders of
Patent Enforcement and Royalties Ltd.
(formerly Ciclo Capital Ltd.):
We have audited the consolidated balance sheets of Patent Enforcement
and Royalties Ltd. (formerly Ciclo Capital Ltd.) as at June 30, 2000 and
1999 and the consolidated statements of operations, deficit and cash
flows for the year ended June 30, 2000 and the eight month period ended
June 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evi-
dence supporting the amounts and disclosures in the financial state-
ments. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at June 30,
2000 and 1999 and the results of its operations and cash flows for the year
ended June 30, 2000 and the eight month period ended June 30, 1999 in
accordance with generally accepted accounting principles.
Chartered Accountants
Toronto, Ontario
July 17, 2000
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2000
1999
ASSETS
Current:
Cash
$
471,293
$ 1,001,395
Amounts receivable and prepaids
39,688
34,495
510,981
1,035,890
Cash held in trust - special warrants
(Note 8)
878,845
-
Investment in Kinbauri Gold Corp.
[Note 3(c)]
330,301
-
Deferred costs
(Note 5)
1,176,657
261,239
Capital asset, net
4,564
-
$ 2,901,348
$ 1,297,129
LIABILITIES
Current:
Accounts payable and accrued liabilities
$
479,303
$
62,314
SHAREHOLDERS' EQUITY
Capital stock:
(Note 7)
Authorized:
Unlimited common shares
Unlimited preference shares issuable in series
Issued common shares
1,739,925
1,709,925
Special warrants
(Note 8)
1,676,846
-
Deficit
(994,726)
(475,110)
2,422,045
1,234,815
$ 2,901,348
$ 1,297,129
Approved on behalf of the Board:
John Cocomile, Director
Brian Courtney, Director
The accompanying notes form an integral part of these consolidated financial statements
Consolidated
Balance Sheets
Patent Enforcement and Royalties Ltd.
8
JUNE 30, 2000 AND 1999
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2000
1999
Revenue:
Interest income
$
35,019
$
11,086
General administrative expenses:
Advertising, entertainment, promotion
12,374
-
Consulting fees
17,169
66,288
Management fees
42,000
32,000
Office and general
48,011
41,765
Depreciation
806
-
Professional fees
47,708
36,280
Investor relations
63,282
-
Rent
12,416
-
Transfer agents fees
5,317
5,014
Travel
15,434
-
Wages and benefits
290,118
-
554,635
181,347
Write down of mining properties (Note 6)
-
158,003
Write down of goodwill on acquisition (Note 4)
-
21,160
Net loss for the period
$ (519,616)
$ (349,424)
Net loss per share
$
(0.05)
$
(0.05)
Weighted average number of shares
10,550,833
10,415,833
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
2000
1999
Deficit, beginning of period
$ (475,110)
$ (125,686)
Net loss for the period
(519,616)
(349,424)
Deficit, end of period
$ (994,726)
$ (475,110)
The accompanying notes form an integral part of these consolidated financial statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
Patent Enforcement and Royalties Ltd.
9
Consolidated Statements
of Operations
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2000
1999
Cash was provided by (used in) the following activities:
Operations:
Net loss for the period
$ (519,616)
$ (349,424)
Items not requiring an outlay of cash:
Depreciation
806
-
Write down of Goodwill
-
21,160
Write down of mining properties
-
158,003
Net change in non-cash
working capital items
411,796
29,939
(107,014)
(140,322)
Investments:
Investment in Kinbauri Gold Corp.
(330,301)
-
Deferred costs
(915,418)
(261,239)
Acquisition of goodwill
-
(21,160)
Acquisition of capital assets
(5,370)
-
(1,251,089)
(282,399)
Financing:
Issuance of common shares for cash (Note 7)
30,000
20,000
Net proceeds of special warrant financing (Note 8)
1,676,846
-
Cash held in trust - special warrant financing (Note 8)
(878,845)
-
Issuance of common shares for acquisitions (Notes 4 & 7)
-
909,500
828,001
929,500
Net change in cash
(530,102)
506,779
Cash, beginning of period
1,001,395
494,616
Cash, end of period
$
471,293
$ 1,001,395
The accompanying notes form an integral part of these consolidated financial statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
Consolidated Statements
of Cash Flows
Patent Enforcement and Royalties Ltd.
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FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
Notes to Consolidated
Financial Statements
1 Incorporation and nature of business:
The corporation was incorporated under the Canada Business
Corporations Act on October 2, 1996 and was continued in Ontario in the
fiscal period ended June 30, 1999.
The Company is in the business of acquiring interests in patents, copy-
rights or other intellectual properties which are being infringed for the
purpose of litigating and participating in any successful judgments
resulting therefrom. The corporation also hopes to participate in contin-
uing royalties or fees from successful settlements.
2 Principles of consolidation:
The consolidated financial statements include the accounts of Patent
Enforcement and Royalties Ltd. ("PEARL") and its wholly owned sub-
sidiary Minesource Exploration Ltd. ("Minesource"). PEARL was formed
by the amalgamation of Ciclo Capital Ltd. ("Ciclo") and the former PEARL
on July 1, 1999. PEARL was incorporated on November 30, 1998 and
acquired by Ciclo in May 1999 (see Note 4).
3 Significant accounting policies:
a Deferred costs Intellectual Property:
The Company is in the start-up stage in the intellectual property law-
suit business and has not earned any revenue to date. Direct costs
incurred in the acquisition of stakes in intellectual property lawsuits
have been deferred with the intention that the deferred expenditures
be amortized by charges against income from future successful law-
suits or settlements. If a lawsuit should prove unsuccessful, or the
case abandoned all costs associated with this case will be written off.
Should the costs incurred exceed the estimated proceeds the costs
will be written down to the estimated recoverable amount.
b Capital asset:
Capital asset, which consists of computer equipment, is carried at cost
and is depreciated using the declining balance method of deprecia-
tion at an annual rate of 30%.
c Investment in Kinbauri Gold Corp.:
The Company owns 750,000 Series A Convertible Preferred Shares of
Kinbauri Gold Corp. ("Kinbauri"). The Shares are non-voting,
redeemable and retractable after the expiration of three years and
extendable for a further two years. Dividends are receivable if and when
declared by Kinbauri based on a percentage of Kinbauri's cash flow for
a limited period of up to five years; 16.3% on the initial $1.6 million of
cash flow, 12.6% on the next $2.0 million and 5.6% on the next $8.4 mil-
lion. A maximum of $986,760 in dividends could be paid on the Series
A Convertible Preferred Shares on cash flow of $12 million.
Patent Enforcement and Royalties Ltd.
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Notes to Consolidated
Financial Statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
3. Significant accounting policies (continued):
In addition, the Company owns 773,003 Series B Convertible Preferred
Shares. The Series B shares are non-voting, redeemable and
retractable after the expiration of three years and extendable for a fur-
ther two years. Dividends are receivable if and when declared by
Kinbauri based on a percentage of Kinbauri's cash flow for a limited
period of up to five years; 19.9375% on the initial $1.6 million of cash
flow, 15.4% on the next $2.0 million and 7.29% on the next $8.4 mil-
lion. A maximum of $1,239,360 in dividends could be paid on the
Series B Convertible Preferred Shares on cash flow of $12 million.
d Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make esti-
mates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the period. Actual results may differ from those
estimates.
e Financial instruments:
The Company's financial instruments recognized in the balance sheet
consists of amounts receivable and current liabilities. The fair value of
these financial instruments approximate their carrying value due to the
short maturity or current market rate associated with these instruments.
4 Acquisitions:
During the fiscal year ended June 30, 1999 Ciclo acquired a 100% interest
in Comoro Capital Ltd. ("Comoro") in exchange for 920,000 common
shares of Ciclo issued at $0.2228 per share or $205,000 in the aggregate.
On June 1, 1999 the two companies amalgamated and continued under
the name Ciclo Capital Ltd. The Company has written off the goodwill
acquired in this transaction. The following represents the fair market
value of the net assets acquired:
Cash and marketable securities
$
183,997
Accounts receivable
6,322
Goodwill
21,160
211,479
Less: Accounts payable
(6,479)
$
205,000
Patent Enforcement and Royalties Ltd.
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Notes to Consolidated
Financial Statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
4 Acquisitions (continued):
During the fiscal year ended June 30, 1999 Ciclo acquired a 100% interest
in Patent Enforcement and Royalties Ltd. for 2,900,000 common shares of
Ciclo issued at $0.25 per share or $725,000 in the aggregate plus cash of
$30,000 and costs incurred in the acquisition of $34,370 for a total of
$789,370. On July 1, 1999 the two companies amalgamated and contin-
ued under the name Patent Enforcement and Royalties Ltd. The following
represents the fair market value of the net assets acquired:
Cash and marketable securities
$
725,000
Deferred expenditures
240,844
965,844
Less: Accounts payable
(7,500)
Less: loan payable
(168,974)
$
789,370
5 Deferred Costs:
Included in deferred costs are all expenditures incurred on behalf of plain-
tiffs on active cases in which the Company has acquired an interest and
cases which are currently being investigated.
The Company has purchased an interest in two intellectual property law-
suits from Intellectual Property Reserve Corporation ("IPRC") for US$75,000.
The details of the agreement is as follows:
I
With regards to the first case the Company has purchased IPRC's 40%
interest in any proceeds of the litigation. The Company's share of any
proceeds are to be split as follows; the first US$150,000 shall be paid
to IPRC with the balance to be split one third to the IPRC and two
thirds to the Company. Included in deferred costs is $507,586 due
from one of the plaintiffs representing his share of the costs incurred
to date by the Company. If the individual does not pay this amount
the Company will recover two times the amount from the proceeds
of any settlement before any percentage allocation.
II
With regards to the second case the Company has purchased IPRC's
10.5% interest in any proceeds of the litigation. The Company's
share of any proceeds are to be split as follows; the first US$500,000
shall be paid to IPRC with the balance to be split one third to IPRC
and two thirds to the Company.
On July 7, 1999 the Company entered into an option agreement to purchase
80% of the issued and outstanding shares of Intellectual Property Reserve
Corporation ("IPRC") for $10. In addition, if the option is exercised the
Company has committed to pay to the optionor their pro-rata share of any
proceeds of the litigation as disclosed above, if and when any proceeds are
received. The option to purchase the shares expires on July 7, 2009.
Patent Enforcement and Royalties Ltd.
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Notes to Consolidated
Financial Statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
5 Deferred Costs (continued):
The Company has agreed, under the terms of a funding agreement with
UFIL Unified Data Technologies Ltd. ("UDTL"), to assist in the enforcement
of UDTL's U.S. Patent No. 5,684,985 covering technology that allows differ-
ent forms of stored digital documents to be searched and accessed more
efficiently on the Internet. In return for assisting in enforcing the patent,
the Company will receive 50% of any revenues, after legal cost, that are
derived from a list which currently has 45 potential infringing parties.
The Company has also entered into an agreement, with a New York based
private toy developer to assist in the enforcement of its copyright against
an international toy manufacturer which is producing a line of toys and
other products in alleged violation of the copyright. The award-winning
toys have been a major marketing success for the manufacturer. In return
for providing financial and case management assistance, the Company will
receive 50% of all revenue derived from the copyright after deducting legal
fees should the Company be successful in reaching a financial reward or
recovery through negotiation or litigation.
6 Interest in mining property:
Pursuant to an agreement dated February 11, 1997 the Company was grant-
ed an option to acquire a 100% interest in a gold property known as the Nat
River Property consisting of 80 claim units in Timmins, Ontario. The
Company paid $20,000 cash and issued 150,000 Common shares at $0.15
per share to acquire the option. The Company had met all the require-
ments of the option agreement and had therefore earned its interest in the
properties.
During the fiscal year ended June 30, 1999 the Company wrote off its invest-
ment in this mining property as it has no further plans on these claims.
During the year ended June 30, 2000 these claims were abandoned.
7 Capital stock:
The Company is authorized to issue an unlimited number of common
shares and an unlimited number of preference shares in one or more
series. The directors are authorized to fix the number of preference shares
and their designation, rights, privileges and conditions attached to the
shares of each series. As of June 30, 2000 and 1999 no preference shares
have been issued.
Patent Enforcement and Royalties Ltd.
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Notes to Consolidated
Financial Statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
7 Capital stock (continued):
The Company has issued common shares as follows:
# shares
$ value
Balance October 31, 1998
6,495,833
$
780,425
Yorkton securities option
100,000
20,000
Issued on acquisition of PEARL
2,900,000
725,000
Issued on acquisition of Comoro
920,000
205,000
Less: Share issue costs
(20,500)
Balance June 30,1999
10,415,833
$ 1,709,925
Stock options exercised
135,000
30,000
Balance June 30, 2000
10,550,833
$ 1,739,925
Of the above issued shares, 2,184,086 are being held in escrow. Releases
are subject to the consent of the Executive Director of the Alberta Securities
Commission and will be released as follows:
1,112,975 on the basis of one share for each $0.20 of cash flow
generated by the Company;
333,334 on March 3, 2001
444,444 on April 6, 2001
293,333 as to one half each on June 1, 2001 and 2002.
Pursuant to a prospectus filed with the Alberta Securities Commission on
September 10, 1997 and an agency agreement dated September 8, 1997 the
Company issued 1,000,000 common shares at $0.20 per share to the public
for gross proceeds of $200,000. The costs of the issue, including agents'
commission were $53,034.
Pursuant to the agency agreement a single non-transferable option was
granted to Yorkton Securities Inc. to purchase 100,000 shares of the
Company at $0.20 per common share. The option was exercised in the fis-
cal year ended June 30, 1999.
The Company has established a stock option plan for its directors, officers
and employees, under which it has granted options to directors, officers
and employees as follows:
I
options to purchase 60,417 [1999 - 100,417] common shares at a
price of $0.20 per share expiring June 2, 2002.
II
options to purchase 229,583 [1999 - 279,583] common shares at a
price of $0.20 per share expiring March 3, 2003.
III
options to purchase 540,000 [1999 - 580,000] common shares at a
price of $0.25 until May 28, 2004.
Patent Enforcement and Royalties Ltd.
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Notes to Consolidated
Financial Statements
FOR THE YEAR ENDED JUNE 30, 2000
AND THE EIGHT MONTH PERIOD ENDED JUNE 30, 1999
7 Capital stock (continued):
IV
options to purchase 5,000 common shares at a price of $0.40 until
June 7, 2004.
V
options to purchase 100,000 common shares at a price of $0.40 until
January 12, 2002.
VI
options to purchase 108,000 common shares at a price of $0.40 until
March 1, 2002.
8 Special
warrants:
On March 31, 2000, pursuant to an agency agreement with Canaccord
Capital Corporation and Northern Securities Inc. (the "Agents"), the
Company sold 3,125,000 special warrants at a price of $0.64 per special war-
rant for gross proceeds of $2.0 million. Net proceeds of the financing total
$1,676,846 after deduction of Agents' commission in the amount of $200,000
and expenses of the offering incurred to date in the amount of $123,154. The
special warrants will be automatically converted into common shares (on a
one for one basis) on the earlier of (the "Expiry Date"): (a) September 30,
2001; and (b) five business days after receipt of a final prospectus qualifying
the distribution of the shares to be issued on the exercise of the special war-
rants. Of the net proceeds of the special warrant financing, 50% is held in
trust by the Company's transfer agent pursuant to an escrow agreement. As
such, the funds are not available for current working capital use. The
escrowed funds will be released to the Company on the Expiry Date as
defined above. As additional compensation, the Company issued to the
Agents non-assignable special rights (the "Agents' Special Rights") of the
Company which are exercisable, without payment of additional compen-
sation, into non-assignable share purchase warrants of the Company (the
"Agents' Warrants"). The Agents' Warrants will entitle the Agents to pur-
chase up to 312,500 common shares exercisable in whole or in part at any
time up to September 30, 2001 at a price of $0.64 per common share.
The Company is in the process of issuing a prospectus qualifying the dis-
tribution of 3,125,000 common shares on the issuance of 3,125,000 previ-
ously issued special warrants. The prospectus will also qualify the distri-
bution of the Agents' Warrants upon exercise of the Agents' Special Rights.
9 Income taxes:
The Company has available approximately $995,000 (1999 - $275,500) in
non-capital loss carryforwards which can be used to reduce future taxable
income. The potential benefit of these losses has not been recognized in
these financial statements and will expire, if unused, in the fiscal years end-
ing June 30, 2003 to 2007.
10 Subsequent event:
On July 1, 2000 the Company and its wholly owned subsidiary Minesource
amalgamated and continued under the name Patent Enforcement and
Royalties Ltd.
Patent Enforcement and Royalties Ltd.
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DIRECTORS
Brian Courtney, Chairman and Chief Executive Officer
Oakville, Ontario, Canada
John Cocomile, President and Chief Operating Officer
Toronto, Ontario, Canada
Kerry J. Knoll, Vice-President, Corporate Affairs
Toronto, Ontario, Canada
Ian J. McDonald
Toronto, Ontario, Canada
Kenneth G. Oakley
Toronto, Ontario, Canada
MANAGEMENT
Brian Courtney, Chairman and Chief Executive Officer
John Cocomile, President and Chief Operating Officer
Denis C. Arsenault, Chief Financial Officer
Kerry J. Knoll, Vice-President, Corporate Affairs
REGISTRAR AND TRANSFER AGENT
CIBC Mellon Trust Company
Toronto, Ontario, Canada
LEGAL COUNSEL
Johnstone & Company
Toronto, Ontario, Canada
AUDITORS
Wasserman Ramsay
Toronto, Ontario, Canada
INVESTOR INFORMATION
Kerry Knoll
Vice-President, Corporate Affairs
Tel: 416-860-1438 Fax: 416-367-0182
Email: info@pearlltd.com
Renmark Financial Communications
Tel: 514-939-3989 Fax: 514-939-3717
Email: info@renmarkfinancial.com
ADDRESS
Patent Enforcement & Royalties Ltd.
6 Adelaide Street East, Suite 220
Toronto, ON Canada M5C 1H6
Tel: 416-860-1438 Fax: 416-367-0182
Website: www.pearlltd.com
SHARE INFORMATION
Listing: Canadian Venture Exchange
Symbol: PAL
Corporate Directory
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